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MOSL: ANNUAL REPORT THREADBARE (ART) | KAJARIA FY19: Return ratios continue to decline

ANNUAL REPORT THREADBARE (ART) | KAJARIA FY19: Return ratios continue to decline

 

• Kajaria’s FY19 annual report analysis highlights the impact of macroeconomic weakness leading to continued pressure on its return ratios (RoE down 310bp to 15.5%/post-tax RoCE down 160bp to 14.4%). This was led by (a) EBITDA margin decline (tiles business) to 15% (v/s 17% in FY18) on rising fuel costs and decreasing unit realization, and (b) rising capital intensity to finance capex for tiles, bath-ware and plywood. Management has plans of adopting an asset-light business model – outsourcing production rather than setting up own facilities. Despite revenue growth of 9.1% to INR29.6b, EBITDA declined 1.5% to INR4.5b. While EBIT margins of the tiles segment declined 80bp to 13.2%, it was superior to its peers (Somany: 6.9%, Asian Granito: 5.0%). However, performance of the bath-ware (Kerovit) was sub-par with EBITDA margins at 4.3%, despite being up 260bp YoY (v/s 14.3% of CERA) due to lower scale of operations. Earnings to cash flow conversion improved to 100% (v/s 80% in FY18), due to decline in cash conversion cycle to 90 days (v/s 103 days in FY18). This was led by increase in trade payables to 98 days (v/s 89 days in FY18). In FY19, the company forayed into the plywood business via its subsidiary Kajaria Plywood. However, losses of INR60.5m turned Kajaria Plywood’s net worth negative (-INR23.5m) in its very first year of operation. 
• Rising fuel costs and lower realizations hurt profitability: Despite revenue growth, EBITDA declined to INR4.5b (v/s INR4.6b in FY18), primarily led by (a) an 18% surge in fuel costs to INR6.2b on rising gas prices, and (b) decline in unit realizations, leading to 9.1% revenue growth to INR29.6b; volume growth was 12% to 80msm.